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Basic EPS

Basic EPS. Net Income - Preferred Dividends Weighted Average Common Shares (WACS). Computation of WACS – Text Page 813. Jan 1 - 90,000 shares outstanding April 1 - issued 30,000 shares July 1 - reacquired 39,000 shares Nov 1 - issued 60,000 shares.

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Basic EPS

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  1. Basic EPS Net Income - Preferred Dividends Weighted Average Common Shares (WACS)

  2. Computation of WACS – Text Page 813 • Jan 1 - 90,000 shares outstanding • April 1 - issued 30,000 shares • July 1 - reacquired 39,000 shares • Nov 1 - issued 60,000 shares

  3. Computation of WACS (authors’ approach) Fraction Sharesof YearWACS Jan 1 -Apr 1 90,000 * 3/12 = 22,500 Apr 1- Jul 1 120,000 * 3/12 = 30,000 Jul 1- Nov 1 81,000 * 4/12 = 27,000 Nov 1-Dec 31 141,000 * 2/12 = 23,500 Weighted avg. common shares (WACS)103,000

  4. Computation of WACS (alternative approach) Shares MonthsMonth Shares Jan 1–Apr 1 90,000 * 3 = 270,000 Apr 1-Jul 1 120,000 * 3 = 360,000 Jul 1-Nov 1 81,000 * 4 = 324,000 Nov 1-Dec 31 141,000 * 2 = 282,000 1,236,000  12 Weighted avg. common shares (WACS) = 103,000

  5. Computation of WACS See E16-16 (part a) handout

  6. DILUTION The reduction in EPS if securities that are potentially convertible or exercisable into common stock are converted or exercised

  7. Stock Dividends and Splits • Require restatement of WACS before the stock dividend or split • Stock dividends or splits during the year are deemed to have been occurred at the beginning of the year • Stock dividends or splits after year-end but before issuance of the financials are likewise restated

  8. Complex Capital Structures • Complex structures have convertible securities, options, warrants, or other rights whose conversion or exercise would reduce EPS • Only securities that reduce earnings per share (dilutive) are considered • Securities that increase earnings per share (antidilutive) are ignored

  9. Measuring Dilutive Effect • Convertible securities: if-converted method • Options and warrants: treasury stock method

  10. The If-Converted Method • The conversion of the securities into common stock is assumed to occur at the beginning of the year • The related interest effect (net of tax) is removed from net income • The weighted average number of shares is increased by the additional common shares assumed issued (at the beginning)

  11. The Treasury Stock Method • Options and warrants (and their equivalents) are included in EPS computations • Options and warrants are assumed exercised at the beginningof the year • The proceeds from the exercise of options are assumed used to buy back common shares • The exercise price per share must be less than the market price per share for dilution to occur

  12. 1 Single Presentation of EPS 2 Net Income less Preferred Dividends 3 Weighted Average Number of Common Shares Outstanding 4 EPS = Result in Step 2 Result in Step 3 Earnings per Share: Simple Capital Structures - Summary

  13. Basic EPS Diluted EPS Dilutive Convertibles Net Income adjusted for interest (net of tax) and preferred dividends ------------------------------------------ Weighted average number of common shares assuming maximum dilution Dilutive Options and Warrants Dilutive Contingent Issues Earnings per Share: Complex Structures - Summary Dual EPS Presentation

  14. Earnings per Share: Complex Structures - Continue with E16-16 handout

  15. Earnings per Share: Complex Structures - See Appendix 16B

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